MIT Center for Transportation and Logistics

Affiliates Program in Logistics (APIL)

“Strategic Outsourcing & Alliances in the Supply

Chain”

MIT Affiliates Day – Hosted by Unilever

Atlanta, GA
September 5-6, 2002

This report was prepared on September 19, 2002 by Andrea and Dana Meyer of Working
Knowledge® meyerwk@workingknowledge.com for the Center for Transportation and Logistics
(CTL). Please contact James B. Rice, Jr. of CTL (jrice@mit.edu or 617.258.8584) if you have any
questions or if you would like to discuss this report.
Table of Contents
1. Presentation Summaries ................................................................................................................ 1
1.1. "Introduction to Unilever," John Rothenberg, Senior Vice President, Supply Chain, Unilever........ 1
1.2. "Logistics at Unilever Home and Personal Care (HPC)," Fred Berkheimer, Vice President
Logistics, Unilever ................................................................................................................ 1
1.3. "Customer and Alliance Relationships at Unilever HPC," Anne Racine, Customer Logistics
Manager, Unilever ................................................................................................................ 2
1.4. Discussion............................................................................................................................. 3
1.5. "Outsourcing and Strategic Alliances at Clockspeed," Charlie Fine, Chrysler Leaders for
Manufacturing Professor of Management, MIT Sloan School of Management .......................... 4
1.6. "Role of Supply Chain in a Growth Company," Alan Jope, Chief Operating Officer, Unilever ...... 5
1.7. "Collaboration: Coordinating the Supply Chain," Yossi Sheffi, Professor and Co-Director, MIT
Center for Transportation and Logistics.................................................................................. 6
1.8. "Strategic Alliances in Distribution (3rd Parties & Outsourcing) at HPC," Joe Ehnat, Director
Warehousing, Unilever, John Seiple, President and Chief Operating Officer, North America,
ProLogis, and Edward Frantz, Senior Vice President, GENCO Distribution System................... 7
1.9. "Strategic Alliances in Purchasing at HPC," Regina Bonney, Director, Best Practice Source,
Unilever ............................................................................................................................... 8
1.10. "Strategic Alliances in Manufacturing at Unilever HPC," Xavier Garijo, Director, Contract
Manufacturing Unilever....................................................................................................... 10
1.11. Summary........................................................................................................................... 10
2. Themes ...................................................................................................................................... 11
2.1. Rationale for Alliances and Outsourcing ................................................................................ 11
Efficient, Low-Cost Execution ................................................................................................. 11
Collaboration for Efficiency, Service Quality, and Cycle Time .................................................... 11
Global Optimization vs. Local Optimization ............................................................................... 12
Expertise................................................................................................................................ 12
Innovation .............................................................................................................................. 12
Local Expertise....................................................................................................................... 12
Finance .................................................................................................................................. 13
Indirect Benefits ..................................................................................................................... 13
Access to Additional Partners.................................................................................................. 13
2.2. What to Outsource............................................................................................................... 13
Core vs. Non-Core ................................................................................................................. 14
Five-Stage Model.................................................................................................................... 14
Value Equation ....................................................................................................................... 14
Value Equation: Internal Value from Focus............................................................................... 15
Value Equation: External Value from Provider.......................................................................... 15
Value Equation: Transaction Costs........................................................................................... 15
Role of Culture ....................................................................................................................... 16
2.3. Downsides to Partnering ...................................................................................................... 16
Avoiding a Bad Case of Intel Inside ......................................................................................... 16
 Exceptions: The Devil's in the Details ....................................................................................... 16
Manual Labor with Automated Systems ................................................................................... 17
Imperfect Partners.................................................................................................................. 17
2.4. Speed.................................................................................................................................. 18
Speed Makes it Easy to Have Open Partnerships...................................................................... 18
Is Speed Good for Brands?...................................................................................................... 18
2.5. Open Questions: Crouching Threats, Hidden Value ................................................................ 18
How do we Know that Quality and Speed is Worth It?.............................................................. 19
Stockouts: Losing Customers or Creating Hoarders? ................................................................. 19
Wal-Mart: Miscreant or Misunderstood? .................................................................................. 19
How to Best Use POS Data?.................................................................................................. 19
Are these Conclusions about Alliances and Outsourcing Temporary? ......................................... 20
Strategic Outsourcing and Alliances in the Supply Chain September 19, 2002

1. Presentation Summaries

1.1. "Introduction to Unilever," John Rothenberg, Senior Vice President,

Supply Chain, Unilever
Unilever is an Anglo-Dutch firm with two chairmen, two headquarters, but one strategy: the Path to
Growth. The company is a $50 billion global business focused on the fast-moving consumer goods
area. At Unilever, supply chain is one of the six strategic elements that underpin the company's
overarching Path to Growth strategy. The strategy aims to double Unilever's growth by 2006. Supply
chain's mission is to act as the fuel for that growth by reducing costs and enabling the company to
quickly implement its innovations. In order to do that, the company must build new capabilities that
support new business models. For example, the channel structure in North America is changing quickly.
The fastest trend is the rise of dollar stores (the previous trend was club stores). Unilever knows it must
go where consumers go. Logistics must support the flow of materials from new suppliers that provide
innovative raw materials to an ever-shifting mix of retail outlets.
Unilever's Path to Growth consists of a three-phase progression. The first, and recently completed,
phase, "Build the Basics," built the infrastructure to support growth, Unilever recently completed this
phased, which refocused factories, changed the scope and scale of distribution centers, and integrated
IT systems across the company. (Integrating IT was a challenge in itself, because it required uniting the
operations of three recently-merged companies: Lever Brothers, Helene Curtis and Chesebrough-
Pond’s). Unilever is in the second phase of growth now, "Exploit the Basics," in which it will exploit
improvements to manufacturing and IT. The third phase, "Raise the Bar" is set for 2004-2006 and will
focus on strategic differentiation, raising the bar with Six Sigma, global innovation, global sourcing and
fulfillment chain processes.
Mr. Rothenberg sees supply chains as interwoven networks, not linear chains. The network structure
implies a new way of managing. Networks require working in a shared collaboration environment,
which is quite a contrast to proprietary supply chains, in which a single company controls the chain.
Unilever is aggressively implementing collaborative opportunities with retailers as well as suppliers.

1.2. "Logistics at Unilever Home and Personal Care (HPC)," Fred

Berkheimer, Vice President Logistics, Unilever
Mr. Berkheimer expanded on the theme of supply chains as networks, providing two examples of
Unilever's experience.
Networked supply chains require flexibility, agility and strong relationships with partners. They also
require technology to link the network and coordinate it toward delivering customer/consumer value.
The benefits which Unilever anticipates from a networked supply chain are greater speed and flexibility;

CTL Meeting Summary – September 5-6, 2002 1

Strategic Outsourcing and Alliances in the Supply Chain September 19, 2002

reduced infrastructure asset costs; gaining leading-edge IT; and expanding capabilities by leveraging
partners' process expertise. All of these benefits support Unilever's growth goals.
The first example that Mr. Berkheimer detailed was that of Unilever's use of Transplace for inbound
transportation. Transplace is a web-based ASP for managing inbound transportation. Unilever chose
inbound transportation for this partnership, as opposed to outbound transportation, because inbound
transportation offered the greatest opportunity for gain. Unilever already enjoys solid performance and
visibility in outbound transportation, but it had poor visibility into the inbound. The new approach
offered a way to gain visibility and to eliminate issues such as rogue shipping. In short, inbound logistics
was the area where Unilever had the least control and visibility -- the company had the least to lose and
the most to gain. Unilever will test the performance of Transplace and compare that performance to the
performance of outbound transportation to compare the two approaches.
The second example is Unilever's Network Mega Center Design -- an ambitious project to consolidate
28 warehouses down into 5 new large-scale distribution centers. The design is to gain a common
warehouse, located regionally within one day of most customers. Each warehouse will support a variety
of different shipments (full pallet, picked case, custom pallet, etc.) Previously, Unilever had multiple
warehouses that focused on a single type of shipment (many inherited from the merger of its precursor
companies). To execute this new design, Unilever is relying on an alliance structure with partners who
have expertise in each of the needed areas. The design was completed by operating partners, an
engineering firm, general contractor and Unilever. The final location selection and incentive negotiations
were conducted by firms Delta and ProLogis. Construction, project management and financing was
provided by ProLogis. Rather than design, select sites, finance, build, and operate these new
megacenters itself, Unilever realized that it could leverage the resources of a network of partners. The
result is the accelerated delivery of higher supply chain performance without taxing Unilever's inhouse
resources or capital.

1.3. "Customer and Alliance Relationships at Unilever HPC," Anne Racine,

Customer Logistics Manager, Unilever
Unilever has a dual team approach to customer and alliance relationships -- a Customer Strategy team
and a Customer Service team. The Customer Service team handles the day-to-day, operational issues
with Unilever's major retail customers. The Customer Strategy team, in contrast, focuses on the
strategic issues that will help Unilever achieve its growth plan. The Strategy Team believes that the best
way for Unilever to meet its growth targets is to improve alliances with customers.
From its experiences with customer alliances, Unilever has learned three important lessons. First,
alliance relationships can't be built without a mutually-beneficial value proposition. Second, common
ground, experiences and shared values can turn the initial value proposition into an effective, long-term
alliance. Third, both partners must be committed to finding true value and savings. Customer alliances
are not about cost shifting.

CTL Meeting Summary – September 5-6, 2002 2

Strategic Outsourcing and Alliances in the Supply Chain September 19, 2002

Ms. Racine gave an example of Unilever's alliance with CVS Drug Stores to illustrate how the alliance
was forged and the benefits it brought. The idea for an alliance originated in 1994. At the time, CVS
was feeling out of touch with its supply chain and wanted to extend its view. CVS invited Unilever to
share its vision of EDI and was excited by the opportunity Unilever described. Unilever had knowledge
and experience with EDI that it could offer to CVS. The initial meeting quickly expanded into an
immediate action: Unilever and CVS people visited CVS stores together to look for opportunities for
improvements, focusing first on non-technical areas such as distribution center loading and unloading
processes and packaging issues. Early successes gained senior management attention. Unilever then
helped CVS create their own EDI program. Unilever had a well-documented EDI program and shared
its people, information, resources and time with CVS, bringing CVS to the point where CVS could
conduct EDI with Unilever. Following that success, the two companies continued with CMI, VMI and
CPFR. The two companies are now working on project Visibility together. What started as a small
project -- helping a customer get a vision of what was possible with logistics -- expanded into a deeper
relationship that has created a very strong alliance with CVS and has helped CVS become one of
Unilever's most technologically advanced customers.
One of reasons for the successful alliance, Ms. Racine said, was that both CVS and Unilever had a very
similar approach to growth, namely growth by acquisition. That helped CVS understand what Unilever
was going through when Unilever merged three companies into one, and it helped Unilever understand
what CVS was going through when CVS purchased Revco and Arbor drug.
In short, Unilever saw an opportunity, responded to it, and worked with its alliance partner to the
benefit of both partners. As value was created, top management became interested, and that built
momentum.

1.4. Discussion
In the discussion, participants shared their experiences with customer alliances. Gillette mentioned
significant commercial benefits that emerged from Gillette's alliance with Carrefour. Gillette was a late
entrant into the VMI alliance that Carrefour was forming with its top suppliers, but it was able to add an
innovation into the system, namely building in a price check. The result is that Gillette does not have to
do adjustments in the deductions and claims management on the back end, thereby getting the benefits
of faster payment and less labor spent on reconciliation. Furthermore, following the successful VMI
alliance, Carrefour asked Gillette to the first company on the launch of a pan-European product. The
alliance required a coordinated approach into all the EU markets at the same time. The deal came
about because of the good will created during the first alliance.
Both Boston Scientific and FedEx reiterated the importance of showing the value-added benefit of a
proposed alliance. Boston Scientific noted that this was especially important with partners who are not
far along in technology and will have to make a greater investment in technology to get the benefits.
Once the potential partner understands what they can gain and how systems across the two companies

CTL Meeting Summary – September 5-6, 2002 3

Strategic Outsourcing and Alliances in the Supply Chain September 19, 2002

can be integrated for mutual benefit, they will be more likely to join the alliance. FedEx added the
importance of building credibility and trust and being seen as a resource in a win-win alliance.
Siemens described an alliance with suppliers that the company has started. The alliance is a networked
supply chain in which the suppliers have relationships not only with Siemens but with each other. The
alliance has a Supplier Council that makes decisions. For example, the council is responsible for freight
costs that are shared by all alliance partners. Council members work together to optimize the freight
costs and redesign material flow if necessary. The dilemma for Siemens in the alliance was the issue of
giving up control in order to get the benefits. The lesson learned: someone needs to own the process
across the network, (i.e., someone must know where the parts are, when they are coming, and when
they are going out). Siemens also tackled the difficulty of a long-time supplier who chose not enter the
alliance. After a difficult decision process, Siemens chose to change to a new supplier who would
participate in the alliance. Siemens also took care to help its alliance partners, for example negotiating
long-term supply agreements with them when they agreed to build a new facility next to Siemens, and
helping them fill capacity at the new facility with other customers, not just Siemens. This was an unusual
move, but one which rewarded the supplier for its investments in infrastructure, new hires, and the
alliance.

1.5. "Outsourcing and Strategic Alliances at Clockspeed," Charlie Fine,

Chrysler Leaders for Manufacturing Professor of Management, MIT Sloan
School of Management
Prof. Fine introduced the concept of clockspeed into outsourcing and strategic alliance decisions.
"Clockspeed" refers to the timespan in which an industry changes. Some industries, such as
microelectronics, operate at a fast clockspeed, with innovations and change coming at a fast pace
compared to industries like mining, where change occurs at a slower speed.
There are numerous factors to evaluate when making an outsourcing decision, but the two primary
factors are dependence and clockspeed. When a company decides to outsource a process, it becomes
dependent on the supplier for that process. Therefore, the strategic sourcing decision involves
considering what processes your company can afford to be dependent upon other firms for.
Dependence can take two forms: dependence on the design of the process, or dependence on the
execution. For example, a company may retain knowledge of how to design a product, but outsource
the manufacturing. In full outsourcing, the company would be dependent on both design and
manufacturing.
Prof. Fine used the example of GM to illustrate the sourcing decision process. GM's Powertrain
division was deciding whether to outsource the engine block casting of its engines. The first question to
ask when making the decision is whether the engine block is a strategic differentiator for GM. In other
words, does the customer care whether GM is casting the engine block? The answer was that the
customer does not care. The second question was that of clockspeed: how quickly does clockspeed
change in the industry? It turns out that clockspeed in this industry was slow. Finally, GM evaluated its

CTL Meeting Summary – September 5-6, 2002 4

Strategic Outsourcing and Alliances in the Supply Chain September 19, 2002

competitive position in the industry. GM was in the middle of the pack with respect to cost-efficiency
on engine blocks, in contrast to Toyota whose costs for casting the engine block were the cheapest in
the industry. Therefore, GM had the opportunity to save money by outsourcing. Given the slow
clockspeed of the industry, the fact that engine casting was modular (not an integral part of the product),
the availability of numerous suppliers, and GM's competitive positioning, GM decided to outsource
engine block casting.
Likewise, a consumer products company could pose similar questions when deciding whether to
outsource bottling of its shampoo. For example, if bottling the shampoo 1) is not integral to the product,
2) is not characterized by a dominant supplier 3) does not operate on fast clockspeed, 4) the customer
is indifferent to who bottles the shampoo, and 5) the bottling is not a strategic or cost differentiator, then
it makes sense to outsource bottling of the shampoo.
In contrast, IBM's decision to outsource the design and manufacturing of chips to Intel for the IBM PC
was a strategic miscalculation. There were few suppliers in the industry and the clockspeed in the
industry was so fast that when a supplier got ahead, it was easy to stay ahead. The fast clockspeed
makes it hard for IBM to invest and regain its position in the PC industry that it created.

1.6. "Role of Supply Chain in a Growth Company," Alan Jope, Chief

Operating Officer, Unilever
Mr. Jope outlined Unilever's building blocks on its path to growth, with supply chain being one of the
strategic thrusts of the company. Unilever's goal with this growth strategy is to double growth within 5
years.
First, Unilever will focus its portfolio on those brands that offer the most potential for growth. For
example, Unilever's Suave and Dove brands are the company's largest. In absolute and percentage
terms, those brands grew the most last year. The brands are large and strong enough to cut through the
clutter. This focus on a few brands represents a strategic change for Unilever, which previously
followed a category strategy. This change in strategy puts a different pressure on the supply chain: it
requires a supply chain strategy of rationalized manufacturing sites and distribution sites with increased
use of outsourcing. The challenge of Unilever is that the company must make outsourcing an
organizational competency.
Second, Unilever will be putting in place a new organizational structure that supports and drives growth.
Unilever reorganized to a matrix organization, with the horizontal axis being teams responsible for
operations and the vertical axis being processes such as brand development, finance, HR, and so on.
From a people perspective, the company has identified the competencies possessed by leaders who
deliver growth. Unilever assessed all of its executives on those dimensions and had to let go 30% of its
vice presidents who did not have those competencies. Thus, in January 2001, the company had new
leadership and 60% of its people were shifted to new jobs as a result of the matrix structure. Whereas
some change theorists would say that the amount of change Unilever went through was too much in one

CTL Meeting Summary – September 5-6, 2002 5

Strategic Outsourcing and Alliances in the Supply Chain September 19, 2002

year, the reality is that Unilever had a great year in 2001. Dramatic change in both people and structure
worked just fine. Mr. Jope recommended that when going through an organizational change, it was
better to be aggressive and get it done quickly rather than draw it out and have too many stages.
Third, Unilever needed financial fuel for growth. It focused on reducing overhead and improving
bottom-line profitability in order to find space in the P&L to drive growth. Fourth, the company will
innovate and pioneer new channels. To accomplish this, Unilever's supply chain has to learn how new
competencies. For example, nonwoven fabrics are a new product area (disposable fabrics for face
cleansing, sunscreen application, and so forth).
Finally, Unilever is building an enterprise culture (in the sense of being enterprising). Unilever went
through a participative process of defining its values and determine what behaviors express those values.
For example, a behavior such as "made decisions with 40-70% of available information" reflects
Unilever's value of innovation and speed.

1.7. "Collaboration: Coordinating the Supply Chain," Yossi Sheffi,

Professor and Co-Director, MIT Center for Transportation and Logistics
Prof. Sheffi provided several case studies of collaboration among customers and suppliers using
collaborative forecasting and planning (CPFR). Among the early pilots of CPFR, (between companies
such as Nabisco and Wegman's in the Planters nut category and Kimberly-Clark and Kmart in the
Depend product line), results were very encouraging. For example, in the Nabisco-Wegman's pilot,
sales went up, inventory went down and service level went up. Similarly in the Kimberly-Clark-Kmart
pilot, in-stock rates increased from 86.5% to 93.4% without any overall increase in inventory levels.
Retail sales increased by 14% and the companies avoided costs by discovering discrepancies in plans
early. The unexpected benefits of the collaboration were improved coordination around product
rollovers and new product introductions. As Prof. Sheffi pointed out, however, many of these early
pilots relied on manual processes more than technology. Although several software providers exist in
the CPFR space (Syncra, Manugistics, i2, Logility and Eqos), much of the success of the pilot programs
relied on coordination that resulted from simple weekly phone calls between the collaborating
companies.
Prof. Sheffi detailed the case of Superdrug and J&J to show collaboration in action. The pre-trial work
included Superdrug finding a CPFR partner. Superdrug chose J&J for four reasons: 1) Superdrug had
done work with J&J previously, 2) J&J had a similar culture to Superdrug, 3) both companies were
committed to speed without fuss, and 4) J&J was enthusiastic about the project. With the partner
selected, the next step was to set the collaboration objectives, which included the agreed-upon sales
forecast and developing a scorecard for benefit tracking. The front-end agreement focused on
expectations and responsibilities. The timeline of the project was to select the partner in April, develop
the front-end agreement and joint business plan in May, do training in July, and run the collaboration
project in August through December, with weekly collaboration calls.

CTL Meeting Summary – September 5-6, 2002 6

Strategic Outsourcing and Alliances in the Supply Chain September 19, 2002

The collaboration encountered various problems of a technical and people/process nature that were
solved in short order. For example, J&J and Superdrug had trouble aligning on exception criteria --
how to decide when a minor discrepancy in the order flow or forecast warranted further attention.
Their ultimate solution was to use the software vendor (who had experience with CPFR) to decide the
criteria. Another problem was visibility of data at Superdrug, due to firewall problems and slow
response. The solution was to change Internet providers. A third problem was inconsistent data feeds
from the supplier, which resulted from bar code inconsistency. The people and process problems
centered on lack of time to do the project. Initially, management anticipated that people would be able
to do the project in addition to their daily duties, but the project required more work than expected.
The solution was to redefine people's roles and responsibilities.
The collaboration project itself focused on weekly collaborations on the sales forecast and on the order
forecast vs. actual order. The companies measured inventory, actual sales vs. sales forecast, and order
sent vs. order received. The results of the project were a stock reduction in RDC of an average of
13%, an RDC availability increase of 1.6%, forecast accuracy improvement of 21% and DOS reduced
by 23.8% against an increase of 11.8% for non-trial lines. In addition to these measurable results, the
project had several subjective successes, namely that the collaboration highlighted relevant issues and
gave access to a range of preciously unavailable data (such as the supplier's internal forecasts of orders
and sales). Overall, the collaboration improved the communications between Superdrug and J&J,
further raising J&J's profile within the category supply team at Superdrug.

1.8. "Strategic Alliances in Distribution (3rd Parties & Outsourcing) at

HPC," Joe Ehnat, Director Warehousing, Unilever, John Seiple, President
and Chief Operating Officer, North America, ProLogis, and Edward Frantz,
Senior Vice President, GENCO Distribution System
To create and manage its new distribution network of 5 million square feet of warehouses, Unilever
created an alliance with seven companies to handle specific aspects such as warehouse operations,
warehouse management systems, layout, and warehouse rack design. Before the alliance, Unilever had
27 distribution centers as a result of its mergers. Unilever knew that to be world class, it had to bring
costs down yet have a network that could supply any customer in the country within 24 hours.
Unilever's solution was a megawarehouse concept, to build a network of 5 distribution centers with
about a million square feet of space each. Each warehouse would operate several businesses under one
roof (for example, laundry brands that turn 13-14 times per year and Health & Beauty Aids, which turn
7 times per year).
In order to build the new distribution network quickly, Unilever turned to its strategic alliance partners
for their expertise. The alliance gave Unilever access to world class capabilities while reducing costs.
For example, Unilever relied on ProLogis to design, build, finance and manage the project -- leasing the
completed warehouses to Unilever. ProLogis created a dedicated team for Unilever with a global
services account manager, a senior product manager, strategic alliance contractors, architects and

CTL Meeting Summary – September 5-6, 2002 7

Strategic Outsourcing and Alliances in the Supply Chain September 19, 2002

engineers. ProLogis maintains ownership of the warehouses, so that if Unilever needs to change tactics,
ProLogis can accommodate that. Similarly, GENCO provides direct logistics, reverse logistics, asset
recovery and freight management.
Unilever uses metrics to track the performance of its alliance partners, looking at metrics such as cost
per case, throughput, safety and case fill. Over time, Unilever plans to migrate to gain-share
arrangements with its strategic partners, so that partners can share in the benefits of driving down costs.

1.9. "Strategic Alliances in Purchasing at HPC," Regina Bonney, Director,

Best Practice Source, Unilever
Ms. Bonney described the role of strategic supply chain management at Unilever and the nature of its
strategic alliances. The role of supply management is to provide the fuel for Unilever's growth, ensuring
best supply at best price to deliver sustainable growth. For example, the supply management group
established a supply management program that resulted in a EUR 1.75 billion buy savings at the end of
2002.
The tag-word for the transformation to world-class supply management is "Unileverage," namely taking
advantage of Unilever's size and global scale. Unilever defines world class supply management as a
process that is fully integrated throughout the business, active in innovation, driving efficient operating
processes, and attracting the best people, suppliers and service. To accomplish this, Unilever is
transforming the role of the buyer from a purchasing agent to a strategic supply manager who is
knowledgeable in markets, brings in suppliers, and acts as a business partner on teams.
Ms. Bonney also explained Unilever's strategic approach to evaluating supply management processes.
Unilever uses a quadrant to assess its approach. The quadrant rates the risk of the process to Unilever
on the vertical axis and the value of the process on the horizontal axis. In the lower lefthand corner (low
on both value and risk) are "routine" processes. These processes are ones in which spend is low; the
items are industry-specific, readily available with many producers and low switching costs. Unilever's
approach to this quadrant is to simplify the process, by using tools such as Ariba, procurement cards,
and electronic catalogs. In short, no alliances take place here: the goal is to minimize the routine
administrative cost and treat the transactions as "no-touch."
The upper lefthand quadrant (high risk, low value) is called "bottleneck" processes. Here, spending is
low and the process has no consumer impact, but it may have unique specifications or constrained
supply. In this quadrant, Unilever develops alternative sources to ensure supply availability, creates
contingency plans, fosters competition, and eliminates technical constraints if possible. The goal is to
avoid shortages.
In the lower righthand corner (high value, low risk) are "leverage" processes that are characterized by
high spend (due to large volume or high price), but the supply items do no differentiate the product and
there are many producers. In this quadrant, Unilever's actions are to regularly assess market conditions,

CTL Meeting Summary – September 5-6, 2002 8

Strategic Outsourcing and Alliances in the Supply Chain September 19, 2002

maximize negotiating advantage (Unileverage) and economies of scale by concentrating the business
while maintaining competition.
Finally, in the upper righthand quadrant (high value, high risk) are "Strategic" processes. These
processes have a significant P&L impact and include the buying of key ingredients or packaging that has
a limited supply base. This quadrant is where Unilever focuses on alliances. The goal is to strive for
high value-added relationships, to increase the role of alliances to develop new materials or packaging.
The goal in these alliances is to develop high-level process improvements that help both partners.
Nature of Strategic Alliances
When choosing strategic partners among suppliers, Unilever looks for suppliers who have superior
technical capability for innovation or for joint product development. Some of them may have poor IT
systems, but Unilever will weigh that on balance with the innovation potential. Alternatively, Unilever
may also ally with a commodity supplier who is very efficient and has superior information systems.
Unilever will partner with these companies if they can synchronize their factories and deliveries to
Unilever's product cycles and thereby lower total supply chain cost.
To succeed, the alliance partners must be willing to dedicate people to Unilever, just as Unilever
dedicates people to its key customers. In turn, Unilever will share consumer insight with these trusted
suppliers. Together, the partners can bring about innovation in packaging (the perception of the
product), raw materials (product performance) or technical demonstration of performance (e.g.,
cleaner, brighter). In these joint development alliances, suppliers share where they are heading in the
future, and Unilever shares its own future directions. Suppliers develop ideas not solely for Unilever,
but ideas that they can ultimately commercialize. If joint development takes place, the companies sign
commercial agreements that define who owns what in terms of the patent, the technology, and so on.
Challenges
The challenges to strategic alliances are twofold: global and electronic. That is, as a global company,
Unilever needs alliance partners who can operate on a global platform, not just in one region. Alliance
partners must understand global markets and regulatory environments. Second, the introduction of
certain e-commerce tools has threatened strategic partners. For example, reverse auctions undermine
alliances because of their price-only focus. Likewise, eRFP and eRFQs bring in new potential suppliers
who previously may not have participated in the bidding process.
In summary, the nature of strategic alliances at Unilever is changing. Some strategic alliance suppliers
may not remain as alliance suppliers because of technical or global shortcomings. Likewise, some new
suppliers will enter the arena as alliance partners because of the technical expertise, new product
breakthroughs or global reach that they offer. Overall, alliances may deepen, becoming partnerships or
joint ventures.

CTL Meeting Summary – September 5-6, 2002 9

Strategic Outsourcing and Alliances in the Supply Chain September 19, 2002

1.10. "Strategic Alliances in Manufacturing at Unilever HPC," Xavier

Garijo, Director, Contract Manufacturing Unilever
The pressure of business in today's world is pushing companies toward strategic alliances in
manufacturing. In the past, contract manufacturing functions did not actively consider make vs. buy
decisions. Contract manufacturing was a response to lack of capacity or forecast accuracy. It was a
reactive process, considered more of a penalty rather than a benefit to the company. Nowadays, the
competitive environment is demanding collaboration between companies to leverage synergies of
expertise.
Two environmental factors are driving strategic alliances in manufacturing. First is the complexity of
consumer/retailer demand (the need to be more responsive and flexible with shorter, more frequent
production cycles and faster, bigger innovations). Second, margin pressures demand a faster return on
asset investments while the life expectancy of products decreases. Amortizing asset investments over
10-15 years no longer works -- five years is the norm. Stronger and fewer consolidated customers
drive prices lower.
Unilever's approach to alliances in manufacturing is to do an internal capability analysis first and then
identify partners. Unilever asks partners to identify drivers in their own supply chain and them manage
more of the supply chain on Unilever's behalf. For example, co-packers manage daily product
scheduling, RM and PM release, material purchasing, QA, supplier KPIs (key performance indicators),
inventory control and finance. Unilever manages supply chain planning, deployment planning, accounts
payable, system capabilities and the IT helpdesk. The benefits of the alliance include greater visibility
into product flow, simplification, higher innovation and an increase in real-time information.

1.11. Summary
At the end of the workshop, participants shared their most important learnings. Among the key
learnings mentioned were:
* the rising importance of alliances and outsourcing
- how Unilever is actively using alliances to drive growth by leveraging the expertise and
resources of its partners
- the components and factors involved in outsourcing decisions
- how to make outsourcing decisions, paying attention to what is integral vs. modular
- the difficulty of implementing IT and integrating information systems across companies. Many
pilots rely on manual processes first, and then build on that success with information integration
and standardization.
- the consumer goods industry is moving more toward outsourcing than away from it, and
therefore the ability to manage alliances will be an important skill set for the future.
* Unilever's embrace of supply chain as a strategy (many companies say they are using supply chain
as a strategic thrust, but few are actually doing it)

CTL Meeting Summary – September 5-6, 2002 10

Strategic Outsourcing and Alliances in the Supply Chain September 19, 2002

* brands
- the value of brands: through all the change, the strength of the brand will continue
- Wal-Mart's goal is not to kill brands but to deliver everyday low prices through branded
products
* the quest for innovation
- the use of a best-practice group to bring both internal and external best practices together to
add value to the business
- the willingness to look outside and bring expertise and innovative ideas from suppliers into the
firm.

2. Themes

2.1. Rationale for Alliances and Outsourcing

Companies use alliances and outsourcing for a myriad of reasons. For Unilever, the top strategic goal is
growth. Partnering with other companies is a means toward growth. Some of the reasons for
partnering include:

Efficient, Low-Cost Execution

Outsourcing lets a company replace inefficient internal processes with much more efficient services from
a best-in-class provider. Payroll processing, HR benefits, logistics, and even manufacturing are all
processes that might be more efficiently performed by a provider that is dedicated to that process.
Often, economies of scale influence this value proposition because the service provider has much higher
volumes than the company. Under this rationale, the company looks for a provider with higher
performance levels and lower costs than the company itself. Outsourcing is thus a way to buy efficient
performance.

Collaboration for Efficiency, Service Quality, and Cycle Time

In the supply chain arena, many alliances have improved coordination between supply chain partners as
a key goal. In particular, CPFR (Collaborative Planning, Forecasting, and Replenishment) is a means
for suppliers and customers to manage the flow of goods far more efficiently. Too many supply chain
inefficiencies and problems arise from simple misunderstandings between the companies.
Prof. Sheffi discussed a number of CPFR projects between CPG companies and major retailing chains.
These included Nabisco with Wegmans, Kimberly-Clark with Kmart, Sara Lee with Wal-Mart and
Procter & Gamble with 4 American, British, and German retailers. Each of these projects saw
improved supply chain performance with some combination of accelerated cycle times, higher service
levels, increased sales, and reduced inventory relative to sales.

CTL Meeting Summary – September 5-6, 2002 11

Strategic Outsourcing and Alliances in the Supply Chain September 19, 2002

Global Optimization vs. Local Optimization

The move from internally-focused supply chain management to external alliances and outsourcing is a
move from local optimization to global optimization. Companies now recognize that they can reach the
next level of performance by working with suppliers and customers. Much of the dreaded bullwhip
effect arises from lags in information flows, mis-coordination, and inaccurate demand forecasting. Data
sharing, CPFR, and closer relationships improve the performance of the entire supply chain.
In the quest for global supply-chain wide optimization, Unilever stresses alliances that create mutual
gain. Rather than shift a problem, risk, or cost from one part of the supply chain to another, companies
should work together to eliminate the problem entirely. As Unilever moves forward with its alliances, it
is exploring mechanisms for gain-sharing – providing incentives to partners in order to improve
performance for the benefit of both parties.
But, global optimization does have costs and seemingly counterproductive effects. For example,
Unilever is moving to global sourcing -- using "Unileverage" to rationalize is supply base. In some cases,
this means replacing a lower-cost local supplier with a more costly global supplier. Although some local
costs may go up, global optimization will create a net efficiency and service level improvement. The
global gain offsets local pain.

Expertise

Outsourcing and alliances also provide access to specialized expertise. This is a major reason why
Unilever went to ProLogis when Unilever wanted a new network of megacenters. ProLogis had the
specialized knowledge for the massive project. Since Unilever has no intention of building new
warehouses every year, it makes sense to find a provider that specializes in this complex task.

Innovation

Access to innovation is a related reason for many alliances and outsourcing arrangements. By finding
mutually complementary core competencies, a company can leverage the innovations of its partners. At
Unilever, three examples illustrate how partners bring innovation to the table. First, Unilever looks to
raw materials suppliers for new innovation materials. These innovative materials include new ingredients
for facial cleansers, additives for detergents, and novel materials such as the new nonwoven fabrics that
form the basis for disposable wipes. Second, Unilever looks for packaging partners that can help
Unilever products have better shelf-appeal. Packing companies create new bottling, boxing, and
printing techniques that freshen the look of products. Third, partners bring innovative best practices,
such as using a 3PL for managing distribution operations.

Local Expertise

Partners also bring local expertise to the relationship. Although global companies would like to create
economies of scale based on world-wide uniformity, such uniformity is not always possible. Local
government regulations impact ingredients or packaging. Local customs and trends affect marketing or
product mix. Supplier partners (local raw materials suppliers or packagers) have the requisite

CTL Meeting Summary – September 5-6, 2002 12

Strategic Outsourcing and Alliances in the Supply Chain September 19, 2002

knowledge of local health, safety, and packaging regulations. Customer partners (local retail chains)
provide insight into local consumer preferences.

Finance

Partners can also aid in the financing of either capital assets or operating capital. Unilever's top strategic
goal is growth. But growth requires investment that can be expensive. Thus, Unilever is looking for
ways to enlist the financial resources of partners. For example, Unilever is in the midst of $200 million
project to build a new network of 5 megacenter DCs. Unilever outsourced the project to ProLogis,
which owns the megacenters and financed their construction. By outsourcing, Unilever converted the
project from a large up-front capital investment into a stream of modest lease payments.
But this arrangement is more than just cost shifting. Unilever recognizes that an alliance that damages
the other partner is not in Unilever's long-term best interests. The key is to ensure sustainability -- using
the open-book policy for a good partnership to make sure that the partner has the requisite financial
resources for a long-term relationship. Other companies also act to share financial burdens and ensure
the survival of alliance partners. Prof. Fine noted how Boeing supports tooling makers like Cincinnati
Milacron -- ordering extra parts or funding R&D efforts to help stave off the effects of severe cyclic
downturns in capital expenditures that characterize the tooling industry.

Indirect Benefits

Some alliances, especially supply chain alliances, have indirect benefits. The partnership generates more
than the anticipated objective numerical benefits. For example, Superdrug's CPFR project with J&J
raised the profile of the retailer within J&J. Partnerships are much better than arms-length transactional
relationships in helping companies understand each other and work together more effectively. Gillette
also indicated that sharing data has extended benefits when the data is used to improve manufacturing
processes.

Access to Additional Partners

Alliance partners also provide access to other potential partners or valuable service providers. As
companies create and nurture networks of partners, more companies will interconnect to gain access to
their partner's partners. One partner would vouch for the suitability of a third company reduces the time
and money spent evaluating and certifying new partners. This speaks to Unilever's view of web-like
supply networks, rather than linear supply chains. For example, with Unilever's megacenter project,
Unilever outsourced the creation of the megacenter to ProLogis. ProLogis, in turn, brought in Delta (for
handling local government incentives related to site selection), St. Onge Company (for warehouse
layout) and others.

2.2. What to Outsource

Outsourcing is growing at a rate of 23% per year because companies are discovering that they do not
need to do everything themselves. Yet, not all processes should be outsourced. Outsourcing the wrong

CTL Meeting Summary – September 5-6, 2002 13

Strategic Outsourcing and Alliances in the Supply Chain September 19, 2002

process could be counterproductive, expensive, or even fatal to a company. Several of the presenters
provided heuristics for determining what to outsource and what to keep in-house.

Core vs. Non-Core

The most crucial aspect of outsourcing is in making the distinction between the core competencies,
which should be kept in-house, and the non-core activities, which are candidates for outsourcing.
Unilever's definition of "core" derives from its top-level corporate strategy of growth with a focus on
global brands.
One element of the core vs. non-core distinction is the issue of controlling one's destiny. Becoming
excessively dependent on partners reduces the strategic options available to a company. For example,
IBM's decision to outsource key elements of the IBM PC to Intel and Microsoft proved to be a
drastically incorrect move.
Unilever also looks beyond the core competencies to consider other crucial processes related to the
core. Processes that nurture the core, protect the core, or help the company exploit its core
competencies are also held internally. Prof. Fine said that the sourcing decision is like deciding where to
plant a seed (either inside or outside). Companies need to think carefully about what they wish to sow,
nurture, and reap inhouse in order to harvest long-term profits.

Five-Stage Model

Prof. Fine enumerated five variables that predict the wisdom of insourcing vs. outsourcing.
* modularity of components/processes: modular elements are more outsourcable than integral
elements of a product or business
* quantity of providers: the fewer the number of providers, the less outsourcing make sense
* clockspeed: the faster the clockspeed, the more you want to insource.
* importance to customer: if the customer cares about it, don't outsource it.
* benchmark performance level: if you have best-in-class performance on the process, don't
outsource it.

Value Equation

Unilever uses a value-equation approach to outsourcing as part of their process for evaluating
outsourcing opportunities. In this model, the net value of outsourcing is defined by three terms:
Net Value = Internal Value From Focus + External Value From Provider - Transaction Costs
This equation is used in addition to careful analysis of core vs. non-core activities. For activities that are
non-core, the equation helps the company assess the value of outsourcing that non-core activity.
Although the equation looks like a simple financial model, many of the terms have qualitative elements.
Outsouricng is more than just a financial decision, because outsourcing's impact is more than just
financial.

CTL Meeting Summary – September 5-6, 2002 14

Strategic Outsourcing and Alliances in the Supply Chain September 19, 2002

Value Equation: Internal Value from Focus

When a company outsources, it frees up a range of internal resources to concentrate on more important
core processes and strategic activities. With outsourcing, management and employees can focus more
on what is important. In some types of outsourcing, a fixed cost or upfront investment is converted into
a more modest stream of payments, letting the company reserve its financial resources for more strategic
investments. Outsourcing lets a company create higher levels of internal value by focusing resources on
higher ROI strategic activities.

Value Equation: External Value from Provider

The value created by the provider is a key part of the value proposition for outsourcing. Providers can
create value by being more efficient, more effective, or more innovative than the internal counterpart of
the outsourced process. The source of the provider's value can fall into one of two categories: value
from high economies of scale or value from high levels of expertise. Value from high economies of scale
occurs when the provider can aggregate the volume of activity from multiple companies through
standardization. Rather than each company doing its own internal low-volume process, the provider
does a high-volume, high efficiency business on behalf of multiple companies. Value from high levels of
expertise occurs when the provider can accumulate large quantities of knowledge that would be hard for
each client company to replicate.

Value Equation: Transaction Costs

Subtracted from the two value terms are the inevitable transaction costs of outsourcing. Whereas
internal coordination costs may be low and hidden, working with a partner leads to more formalized
processes that have higher, more visible costs. Extra transaction costs arise from having to formally
specify what the partner is to do, managing that external activity, and then inspecting the results. Having
a partner in another city do some routine task is different from having an internal department on the next
floor do that same task. When outsourcing, companies can easily underestimate the transaction costs
because the internal analogs are hidden from view.
Unilever decomposes transaction costs into 3 categories:
1) Oversight costs: the cost of managing the relationship, performance, information exchange, service
delivery, and monies.
2) The switching costs: the cost of changing from insourcing to outsourcing (as well as the potential
costs of changing the arrangement at a latter date)
3) Risk: The potential costs of problems associated with the outsourcing arrangement
Unexpected costs sometimes cause companies to oscillate between outsourcing and insourcing. They
outsource on the perceived cost benefits and insource when they realize the magnitude of unexpected
costs.

CTL Meeting Summary – September 5-6, 2002 15

Strategic Outsourcing and Alliances in the Supply Chain September 19, 2002

Role of Culture

On the surface, outsourcing and alliances focus on objective performance improvement and a business-
like exchange of monies, goods, and information. But subjective factors play a crucial role in the
success of any partnership. For example, Unilever indicated its alliance with drug store chain, CVS,
went more smoothly because both companies were growing by mergers and acquisitions. The partners
understood the special issues of managing a supply chain while integrating newly merged business units
together. Prof. Yossi Sheffi noted how a similarity of culture between Superdrug and Johnson &
Johnson aided their CPFR project. Sharing a similar culture or similar corporate history helps the
partners understand each other and appreciate the issues that each faces.

2.3. Downsides to Partnering

The presenters and audience members also shared stories about the downsides of alliances and
outsourcing.

Avoiding a Bad Case of Intel Inside

IBM had tremendous expertise in both chips and software when it embarked on development of the
IBM PC in the early 1980s. But the company outsourced the CPU to Intel and the operating system
software to Microsoft to accelerate its time to market and leverage those partners’ expertise in smaller,
low-cost computer systems. Although the IBM PC was a stellar success, Intel and Microsoft reaped
the lion's share of the profits and IBM eventually became a marginalized maker of the machines that it
invented. Thus, outsourcing can be very dangerous.
This key danger of outsourcing is well known. Companies must preserve and nurture some form of
competitive advantage in the form of core competencies. Most of the presenters stressed the
importance of identifying a company's strategic core competencies before outsourcing or partnering. A
company that outsources its future has no future.

Exceptions: The Devil's in the Details

An important part of any partnership is managing exceptions -- discrepancies in operations and plans.
Whereas an internal business process manages exceptions informally, alliances and outsourcing
arrangements need formal processes to cope with them. This includes defining what constitutes an
exception and creating some mutually agreeable mechanism for resolving them.
In particular, a major element of CPFR is in detecting and correcting exceptions in the flow of orders
and the forecasts of the two companies. Prof. Sheffi delved into this issue in describing how Superdrug
and J&J created a CPFR program. Managing exceptions involves: defining the exception (metrics and
thresholds), defining how to detect/measure exceptions (data and process), creating a resolution
process, and defining a set of KPIs to assess the success of the overall effort. For example, Superdrug
and J&J created a weekly cycle for CPFR that featured data processing during the early part of the
week, a mid-week conference call to resolve found exceptions, and an end-of-week adjustment and
review process.

CTL Meeting Summary – September 5-6, 2002 16

Strategic Outsourcing and Alliances in the Supply Chain September 19, 2002

Even agreement on the definitions of exceptions can be difficult for two reasons. First, different
companies use different metrics and timeframes (e.g., one company might measure forecast error in
percentage terms on a rolling 2-week basis and the other might measure it in absolute weekly item-
count terms). Second, companies may have differences of opinion on whether a minor error or
inaccuracy really merits being declared an exception. Minor statistical fluctuations are inevitable and
inconsequential -- coordinating the resolution of minor issues is not worthwhile. Yet some companies
have less tolerance for error, either due to cultural reasons or due to a very tightly-run operations with
narrow margins for error. Superdrug and J&J disagreed on the definitions of some exceptions and
decided to let their CPFR software vendor (Syncra) define these exceptions.

Manual Labor with Automated Systems

Prof. Sheffi noted that software automates data sharing and exception detection in supply chain alliances
but does not do the work of resolving the exceptions. The manual labor attendant with CPFR seems to
be a real bottleneck to more widespread use of CPFR. The manual processes do not scale. For
example, in the various pilot projects described by Prof. Sheffi, most projects focused on a couple
dozen SKUs from one CPG maker and a small number of DCs or stores (although one project did
extend to nearly 6000 stores).
Scalability is a major issue: Wal-Mart does forecasts for every SKU in every store, some 70-80 million
forecasts per week. Clearly, more automation is required. Prof. Sheffi argued that more automated
resolution of exceptions is an algorithmic challenge for future generations of CPFR software. With
improved software, companies could pursue much broader supply chain alliances and create alliances
with smaller partners.

Imperfect Partners

It's easy for some corporate committee to create a list of mandatory prerequisites for the perfect
partner. But perfection is too much to hope for. Real partners have real foibles and seldom pass the
test for the perfect partner. Unilever found that it must be more flexible in partner selection than sticking
to a strict list of prerequisites. For example, some potential partners might be a klutzy innovators --
great at creating new innovative materials, but terrible at routine daily execution. Or, other partners
might be efficient Luddites - - having excellent performance metrics, but being unable/unwilling to adopt
the technology needed for effective supply chain coordination.
Unilever uses a more flexible case-by-case rationale when selecting partners. The company can also
regulate the volume of business that it does with imperfect partners. For example, Unilever might buy a
smaller fraction of materials from a klutzy innovator -- gaining access to the partner's innovative
materials while insulating Unilever from the risks of relying on an erratic partner. Unilever will also help
partners perform better or adopt needed new technologies -- growing better partners as much as
picking the best off-the-shelf partner companies. Finally, partnerships are not static, everlasting entities
-- companies, like Unilever, regulate the volume of business they do with each partner and the duration
of the partnership. Although no one in the room wanted to take Sun Microsystems' approach of being
able to escape any partnership in 90 days, companies can change their partnerships over time to meet
new needs.

CTL Meeting Summary – September 5-6, 2002 17

Strategic Outsourcing and Alliances in the Supply Chain September 19, 2002

2.4. Speed
Alliances and Outsourcing support the need for speed. Rather than taking the time to develop a new
skill in-house, companies can outsource to companies that have that skill. Unilever outsourced design,
construction, and management of its new network of 5 megacenters because its partners could do the
project much faster than Unilever could.

Speed Makes it Easy to Have Open Partnerships

Unilever surprised the audience with the company's preference for non-exclusive uses of the innovations
that its partner's bring to Unilever. The audience wondered why Unilever would not want to keep any
and all innovations out of the hands of its competitors. Unilever's response reflects the realties of first-
mover advantage in a high-speed competitive world.
Being the first is more important than being the only company with an innovation. That competitors
might buy the same innovative ingredient from Unilever's supplier is not a major threat because
Unilever's product will already be established in the market. Unilever also argued that
commercialization of innovations, by its partners, provides a long-term benefit to Unilever. Unilever
benefits from its partner's economies of scale when those partners sell in higher volumes to other
companies. Moreover, having partners that are more broadly connected makes those partners more
innovative. Captive partners would be both less cost efficient and less innovative.

Is Speed Good for Brands?

Prof. Fine pointed out that brands are slow-speed entities. Companies invest millions (or even billions)
in creating a long-lasting brand image that creates a steady stream of revenues from loyal customers.
The success of this is illustrated by the classic anecdote of how "my grandmother used Tide detergent,
my mother used Tide, I use Tide." Yet, the pace of life has quickened, leading to the question of
attention deficit disorder among consumers. Unilever believes that a hectic life actually increases brand
buying -- that consumers just buy the brand that they trust, rather that spending time evaluating
alternative products.
Although brands are slow clockspeed entities, Unilever pointed out the numerous ways in which the
products change at a faster clockspeed. Innovation in facial cleansers is on a six-month cycle, even
though the Pond's brand of facial skincare products dates back to 1846. Likewise, detergents have
changed over the years with innovative stain removers, color-safe bleaches, and fabric softeners. The
point is that many companies, Unilever included, try to combine speed of innovation with the stability of
a long-term brand.

2.5. Open Questions: Crouching Threats, Hidden Value

Presenters and audience members raised a number of unresolved issues -- questions that seem to have
no answer or contradictory opinions about the answer.

CTL Meeting Summary – September 5-6, 2002 18

Strategic Outsourcing and Alliances in the Supply Chain September 19, 2002

How do we Know that Quality and Speed is Worth It?

Unilever and others are wrestling with how to justify and measure efforts that improve non-financial
performance levels. Although everyone acknowledges the theoretical importance of speed and service
levels, at a practical level it's too easy to resort to a cost-based focus. For example, CPFR reduces
mistakes in forecasting, inventory, and order flow. But how should the company account for the
associated cost avoidance?
Alliance initiatives like CPFR involve both upfront investments (new software and integrated data links)
and ongoing labor costs (manual exception resolution). Although CPFR has undeniable benefits, the
biggest benefits are non-financial. But, how much should companies pay for a 1-day reduction in some
cycle time or a 1% improvement in forecast accuracy? While Gillette felt that CPFR is easy to justify,
other companies are wrestling with this issue. Cost efficiency is so much easier to measure and so much
more tangible in its bottom-line impact. When in doubt, why pay more?

Stockouts: Losing Customers or Creating Hoarders?

Unilever highlighted one of the major service level problems in CPG -- stockouts on store shelves.
Although everyone acknowledges that stockouts lead to some level of lost sales, Unilever pointed out
that stockouts also lead to customers switching brands. For brand-oriented companies, customer
loyalty is their lifeblood and stockouts cause the company to bleed customers.
At the same time, some audience members mentioned the counterargument of this -- the hoarding effect
at Costco. When consumers (or even buyers at companies) know that stockouts can happen, they tend
to buy more when the product is available. Whether stockouts enrage or encourage customers is an
open question. What is clear is that hoarding does make a mockery of the forecasting and supply chain
management process -- hoarding and over-ordering amplify the bullwhip effect.

Wal-Mart: Miscreant or Misunderstood?

Although popular perception puts Wal-Mart in the 800-pound gorilla category, both Unilever and
others mentioned that Wal-Mart is not the overbearing giant that it is often made out to be. Wal-Mart's
strategy of selling branded goods at everyday low prices means that it continues to want a good
relationship with brand-oriented CPG companies. Wal-Mart even discussed its plans to offer private
label goods with Unilever, rather than unilaterally foist new competition on the name-brand CPG
companies that supply Wal-Mart. When Wal-Mart changed to a new suction technology that damaged
suppliers’ cardboard cartons, Wal-Mart worked with suppliers like Unilever to find a solution. Rather
than force suppliers to design and use more costly new carton designs, Wal-Mart changed its handling
procedures to avoid damaging the existing cardboard cartons. Finally, Wal-Mart is not as dominant in
market share as some would think, when compared to the situation in other countries. In many other
countries, the local dominant retailer has a far higher market share than does Wal-Mart in the U.S.

How to Best Use POS Data?

Although many have portrayed POS data as the Holy Grail of demand signals, Gillette has found that
this data is less useful than one might imagine. The problem is that demand data only tells you that a

CTL Meeting Summary – September 5-6, 2002 19

Strategic Outsourcing and Alliances in the Supply Chain September 19, 2002

given quantity of a given SKU was sold at a given store on a given date. It fails to tell you whether and
when the retailer will want to reorder the product to replenish the sold stock or change the future stream
of orders as part of a change in forecast demand. Unless the supplier intimately understands how its
customer uses POS data to drive the replenishment and forecasting process, the data itself is not as
useful as one might think.

Are these Conclusions about Alliances and Outsourcing Temporary?

Prof. Fine's statement that "all conclusions are temporary" resonated with the audience and was echoed
in other speaker's presentations. Prof. Fine's double-helix of industry cycles described how industries
tend to cycle between highly-integrated industry structures (with proprietary, integrated product
architectures) and horizontal industry structures (with open, modular product architectures). In each
loop of the cycle, companies battle for domination, while innovators arise. Big vertically integrated
companies may have global power, but they also tend to be slower and more conservative. Nimble
upstart providers of innovative products may grab market share from larger dinosaurs, but eventually
those innovators grow up to be just like the older imperialistic companies that they replaced.
Unilever realizes that it must adapt with the ebb and flow of these trends. If the tide of retailing turns
from massive suburban big-box stores to smaller local urban outlets, Unilever will change to follow
consumers. Although its supply chain may change, Unilever believes that high-quality brands have the
power to persist. Even if all conclusions are temporary, the power of agility to adapt to new conditions
is a key skill that companies like Unilever are building.

CTL Meeting Summary – September 5-6, 2002 20